A second generation LGPS

Source: PSE Aug/Sep 16

Cllr Kieran Quinn, chair of the Greater Manchester Pension Fund and Local Authority Pension Fund Forum, and leader of Tameside MBC, discusses the changing landscape for the Local Government Pension Scheme (LGPS).

The future of the LGPS is at the centre of government plans to significantly alter the governance shape of the largest funded public pension system in Europe. With assets nudging the £220bn mark, and 5.1 million members employed by over 11,800 employers, the management of these assets and liabilities remains a huge challenge for the 89 schemes in England and Wales. 

For English and Welsh schemes, the government’s reform challenge sets out four key criteria: scaling consolidation through pooling to a £25bn benchmark target; reducing investment and administrative costs whilst maintaining fund performance and appropriate asset allocation; diversifying accountability and control through non-member structures; and – of course, the holy grail – improving the capacity and capability to invest at scale in infrastructure, now and in the future. 

Reform options remain tough 

Over the timeline of government consultation on this agenda, the LGPS community has made extraordinary efforts to adapt and accept that change has to happen. Some measures floated have, thankfully, been avoided, like forced scheme mergers and mandatory passive investment strategies. So, too, has the ambitious goal of the former mayor of London for a single UK-wide Sovereign Wealth Fund (SWF) administered by HM Treasury. The LGPS is not and cannot be a SWF due to its complex liabilities for pensions now and in the future. 

The reform options however remain tough: pooling investment strategies and assets is a very new experience for many funds not used to making actual investment decisions. Creating complex legal structures for some pools has increased short-term costs and uncertainties across participating fund staff. Coupled with operating in uncharted territory, funds have faced steep learning curves and partnering arrangements within pools are not yet uniformly smooth in operation. For councillors, the member role has, as yet, been underplayed in pooling discussions and it will be important in the next period to highlight that role afresh and reinforce their key power of accountability and leadership in the process. 

Winners but many losers 

Alongside pooling guidance, government consulted on a kind of ‘deregulation’ of Investment Regulations that, whilst welcomed, posed questions over a ‘power of intervention’ for the secretary of state, potentially too wide-ranging, and implying potential direction over particular investment strategy outcomes. 

The implications of change for asset managers may be more drastic. Pooling will overall reduce fees and income. There will be some winners but many losers. More internal asset management going forward will create stiff competition when tendering mandates. Fee reductions for plain vanilla indexing may reduce fees to virtually zero via joint procurement. 

Some ‘boutique’ managers may not offer fee reductions though due to scale restraints. Of course pools will become large enough to indulge in more esoteric investment strategies that may, in the long run, increase fees paid.

Responsible Investment 

The place of Responsible Investment (RI) and shareholder rights will be crucial as pools start to plan their commitments. These will need to reflect existing approaches at the fund level as new Investment Regulations are likely to further embed RI as a fund-level responsibility. For its part as the leading ESG (Environmental, Social and Governance) player in the LGPS market, the role of the Local Authority Pension Fund Forum cannot be replicated at pool level, although collective shareholder engagement may grow. 

On infrastructure, whatever the outcome of new governance structures for pooling investment assets, there will be general support within LGPS funds to create a national approach to infrastructure as bigger infrastructure investments will be more achievable for the LGPS as a whole. 

My sense is that the government intervention in the investment and governance of the LGPS has forced us to take a long, hard look at our existing and previous practice. It has thrown up radical prospects, but has also enabled the LGPS community to step back, reappraise what better practice might look like and, as ever, take up the challenges posed with a will to make them work in the best interests of all those five million members. Only time – and a lot more hard work – will tell.

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